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01 December 2015
The High Court has struck out a number of claims brought by shareholders in what was, in 2008, Lloyds TSB against its directors.(1) The claims alleged that the directors owed fiduciary and tortious duties in the context of providing information to shareholders and in seeking their approval of a transaction which resulted in Lloyds TSB's takeover of HBOS in November 2008. The shareholders sought compensation for losses of upwards of £300 million.
This update focuses on the court's treatment of the fiduciary duties which the shareholders alleged had arisen and been breached.
In 2014 – shortly before the six-year limitation period was due to expire – shareholders brought a claim against the directors of Lloyds TSB who were in office in 2008. The shareholders alleged that the directors had failed to disclose the true nature of HBOS's financial condition, including its receipt of funding of around £25.65 billion and $18 billion (£12 billion) from the Bank of England and a loan facility of around £10 billion from Lloyds TSB before the takeover.
The shareholders enjoyed a victory in July 2015 when they obtained a judgment significantly narrowing the scope of documents that the defendants were entitled to withhold on the grounds of litigation privilege.(2) However, numerous aspects of the shareholders' claim have now been struck out.
In their particulars of claim, the shareholders submitted that as a result of the directors' "vastly superior knowledge" of the state of HBOS compared with that of the Lloyds TSB shareholders, the directors had voluntarily assumed responsibility for:
The shareholders argued that in providing information on HBOS and in procuring or permitting the transactions to be put before the shareholders for approval, and in procuring completion of the transactions, the defendants owed the claimants a common law duty of care in tort and fiduciary duties. The alleged fiduciary duties included the duties:
The pleaded common law duties of care included a duty not to mislead or conceal information and a duty to ensure that information provided to the shareholders was complete and did not contain material omissions.
The defendants admitted that, insofar as they made any written statements or provided recommendations in the public documents provided to shareholders, they owed a duty to take reasonable care and skill. The defendants also could not dispute the duties mentioned in the third and sixth points above, and in any event suggested that these fell under a duty "in equity" as opposed to fiduciary duty. This duty was described by the judge as the "sufficient information duty" – a duty in equity to provide the shareholders with sufficient information so as to enable them to make an informed decision as to how to vote at the extraordinary general meeting in relation to the HBOS takeover.
The directors denied the other fiduciary duties on the grounds that company directors do not generally owe fiduciary duties to shareholders in the absence of a special relationship, and that there was no reason on the facts to conclude that the directors owed any equitable duty other than the sufficient information duty.
The court found for the defendants as to the non-existence of the particular fiduciary duties allegedly owed by the Lloyds TSB directors to the shareholders.
It is well-established law that company directors owe fiduciary duties to the company; this arises from the fact that directors are agents of the company.(3) Directors do not generally – solely by being directors – owe fiduciary duties to shareholders, either collectively or individually. The court explained that this is supported by policy reasons; however, determining the position in each case also requires close analysis of the nature of a director's relationship with the company as compared with the shareholders.
The court drew on the principle that only the company – not its members – can sue for wrongs done to the company, and that in those circumstances shareholders specifically cannot sue for losses that are merely derivative or reflective.(4)
Otherwise, directors would be liable to a torrent of "harassing" actions by minority shareholders. This would place an unfair burden on the directors. The court was also reminded of circumstances in which imposing a duty on directors to act in the best interests of shareholders could foreseeably place a director in a position of conflict with his or her primary duty to the company.(5)
Nature of relationship
The court recognised that there are circumstances in which a director could assume fiduciary duties to shareholders. However, this is dependent on establishing a 'special factual relationship'. This special relationship must be more than the usual relationship between director and shareholder, giving rise to a relationship of trust and confidence. In this case, it was not enough that the Lloyds TSB directors had "superior knowledge" of HBOS; since the directors directed and controlled Lloyds TSB's affairs, this would almost inevitably be the case.
To establish the range of fiduciary duties alleged by the shareholders, there would need to be some kind of personal relationship or particular dealing or transaction between the parties, such as is more commonly found in small, closely held companies. That was absent in the case of Lloyds TSB.
Finally, as well as considering the nature of the relationship between the directors and shareholders of Lloyds TSB, it was essential to identify the content of the accepted sufficient information duty and subsequently to analyse that duty to consider whether it should properly be characterised as fiduciary duty. In this respect, the court cited RAC Motoring Service Ltd ( 1 BCLC 307): "The essence of the [sufficient information] duty is reasonableness or fairness in the circumstances having regards to the interests of the company as a whole" (emphasis added).
In light of this, the court explained that the wellspring of the sufficient information duty was common fairness; where directors invited shareholders to an extraordinary general meeting, fairness required the directors to explain clearly the purpose of that meeting.
There was nothing on the facts to suggest that the directors had undertaken to act for or on behalf of the shareholders in such a way as to:
Regarding the duty to act in good faith, the court commented that 'good faith' is more often used as shorthand for the duty of a fiduciary to disclose material facts before entering into a transaction with its principal, which it is possible to breach without conscious or deliberate impropriety. However, this extended sense of a good-faith obligation was not found to form part of the sufficient information duty, which is a duty in equity rather than a fiduciary duty.
As such, the first, second, fourth and fifth alleged duties set out in the particulars of claim (and above) were struck out.
This judgment clarifies the nature and reach of duties owed by directors. The court provided helpful guidance on circumstances in which directors can be found to have assumed fiduciary duties towards shareholders of a company. It seems, however, that those duties arise rarely – in particular, only where companies are small enough and there are personal relationships or specific transactions taking place between directors and shareholders. The general position (propped up by ongoing policy reasons) remains that directors, having a direct relationship with the company alone, will generally not have a close enough connection to the shareholders to give rise to fiduciary duties.
For further information on this topic please contact Maria Petzsch or Simon Hart at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
(1) Sharp v Blank  EWHC 3220 (Ch).
(2) Only recently released – see  EWHC 2681 (Ch).
(3) Peskin v Anderson  1 BCLC 372 applied.
(4) For example, see Prudential Assurance Co Ltd v Newman Industries Ltd (no2)  Ch 204.
(5) See  2 BCLC 1 at 14.
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